What Exactly Is “Fiat Currency” (And Why It Fails)

In July 1946, inflation in Hungary got so bad that prices were doubling every 15 hours. A worker could pay for breakfast in the morning and found the money bought less than half as much the next day. 

And you could forget about anybody being willing to lend you money. 

Before the end of the month, the Hungarian government had printed a 100 quintillion pengő note — a bill with 20 zeros. It remains the worst period of hyperinflation in recorded history.

Weimar Germany in 1923 was almost as bad: By late 1923, a loaf of bread that had cost a few hundred marks earlier in the year cost roughly 200 billion marks. Germans burned stacks of currency in their stoves because the paper was cheaper than firewood.

Zimbabwe’s central bank issued a 100 trillion dollar note in January 2009. By that point, the currency had collapsed so badly that even astronomical denominations had little practical value. 

Venezuela has lopped zeros off the bolívar three times since 2008 — fourteen zeros in total — and millions have fled the country. 

Revolutionary France’s assignats began as bonds backed by confiscated church lands, then became paper currency and collapsed as issuance outran the underlying land’s value. The Continental Congress printed paper dollars to fund the American Revolution, and “not worth a Continental” had entered the language by 1781. 

The Confederate dollar also collapsed completely, and the Confederate government in Richmond was forced to result to the printing press. At the beginning of the war, one Confederate dollar was set to equal 1 U.S. dollar. By the end of the war, the exchange rate was 300 to 1000 to 1… if the currency was honored at all. The Confederate war effort was essentially crippled, except for what they could buy in gold or U.S. dollars. 

All these currency failures had one thing in common: At the time of collapse, they were fiat currencies, or they became fiat currencies once the link to anything tangible broke down. 

Money has taken three broad forms over history.

In Commodity money, the value is intrinsic to the coin itself: A gold sovereign contained a standard quantity of gold. A silver dollar contained silver. The metal was the money. It didn’t need to be backed by anything. The money was backed by it. 

Representative money is currency redeemable on demand for a fixed quantity of metal. It first appeared in 11th-century China, where merchants began trading receipts instead of carrying heavy coins around. These were coins held on deposit in a bank set up for that purpose. The Chinese government soon began formalizing the practice. 

Representative money reached Europe in the 17th-century through London goldsmiths, who issued paper claims on stored gold that began circulating as money in their own right. The Bank of England formalized the system with redeemable notes in 1694, and most Western governments followed by the 19th century. The United States used gold and silver certificates throughout its first 160 years. 

Fiat money — from the Latin fiat, meaning “let it be done” — is paper or digital ledger entries that cannot be redeemed for anything. The coins have no intrinsic value, and are not backed by anything, except for public faith that other people will accept that currency tomorrow. There is nothing else supporting or holding up the value of fiat currency, and they trade freely against other currencies. 

Today, every major currency in the world today is fiat. The modern fiat currency era goes back to 1970, the collapse of the Breton-Wood Treaty, and President Nixon’s decision to remove the dollar from the gold standard it had long adhered to. 

Fortunately, the U.S. dollar has not experienced a spectacular pengő-style collapse. Instead, savers in the U.S. have experienced a slow, steady erosion

Since 1913 — the year the Federal Reserve was created to control inflation and preserve the credibility of the dollar — the dollar has lost fully 97 percent of its purchasing power. Since Nixon dumped the gold standard, the dollar has evaporated by about 88%. One 1971 dollar bought what 12 cents buys today.

It seems manageable over the course of a year. But over a typical retirement lifespan, the effect is still devastating. 

Fiat currency gives policy makers more freedom in the short run to react to economic dislocation: In times of trouble, they can either fire up the printing presses, or they can wave a magic wand and increase the money supply. The Fed does this by buying Treasury bonds, or by giving banks more money to lend. 

But in the long run, fiat currency has one massive built-in flaw: There’s no external discipline on the money supply. 

And this is a problem: Under a gold standard, a government cannot print more than its reserves allow without triggering a run on the Treasury’s gold. Under the fiat system, the only constraint is the judgment of the central bank and the patience of bond buyers. 

Politicians respond to short-term incentives. Every congressman wants money and jobs flowing into his district. Every senator wants to fund the base, the highway, the military contract, the subsidy that employs voters back home. 

Tax hikes to pay for those things cost votes. So do program cuts. Borrowing pushes the reckoning back past the the next election. Printing money — through deficits financed by borrowing — pushes it further still, onto savers who pay through inflation instead of through any line-item cost.

But the bill gets paid one way or another. Either government pays it down directly, pays bond payments, or the currency gets inflated away, and borrowers get to borrow big dollars and pay back small ones.

Lenders naturally hate this—and price in expected inflation with higher interest rates. But inflation is an insidious form of taxation itself: It transfers wealth from savers and wage earners to borrowers and governments without appearing on anyone’s ballot.

This is the quiet cancer that fiat currency systems enable. 

After World War II, the Bretton Woods system pegged foreign currencies to the dollar and the dollar to gold at $35 per ounce. Foreign governments could redeem dollars for American gold at that rate. But Americans could not. 

By the late 1960s the system was buckling. The United States was financing the Vietnam War, the broader Cold War against Communism, funding NATO and maintaining a massive Army and Navy, and funding Johnson’s Great Society and War on Poverty programs simultaneously. And we were running persistent balance-of-payments deficits to do it. 

More dollars circulated abroad than the Treasury’s gold stockpile could cover.

Remember I pointed out that under a representative currency system, overspending would soon trigger a run on the Treasury’s gold? That’s exactly what happened. France, under Charles de Gaulle, began redeeming dollars for American gold at scale. Other central banks, not wanting to be last in line in case of a crisis, followed suit. 

On Sunday, Aug. 15, 1971, President Richard Nixon went on television and “temporarily” suspended dollar convertibility into gold. 

The suspension has never been lifted.

Since that evening, no major currency in the world has been backed by anything other than a government promise. If that. 

Nixon’s decision was not ideological. His administration faced a choice between holding the $35 gold price and watching the Treasury’s vault empty. Which would likely have resulted in Weimar-style hyperinflation.

They chose to stop honoring the commitment.

Since then, the dollar predicably fell, and the price of gold rose. 

Fast forward to today: As of April 24, 2026, spot gold traded near $4,700 per ounce — roughly 134 times the old $35 Bretton Woods price.

Gold isn’t that much rarer than it was in 1971. It’s not that gold has more intrinsic value. It’s that the fiat currencies used to buy it—including the dollar—have become that much more worthless. 

The chart below tracks the purchasing power of both gold and the U.S. dollar since Nixon closed the gold window. Cash has lost 88 percent of its purchasing power, while gold has climbed more than 13,000 percent.

The same pattern runs through every major fiat currency. Some have held up better than others. None has held its value in terms of gold.

An investment in gold today amounts to a bet that the black line will keep falling. It doesn’t need to be more complicated than that. And given the history of fiat currencies over centuries, that’s a pretty safe bet, in the long run.

Gold pays no dividend. It generates no earnings. It pays no interest. It is not an investment in the conventional sense.

Gold is a hedge, but not a perfect one. It trades in dollars, swings with sentiment and real interest rates, as do bonds and real estate. It tends to underperform when real yields are high and prices are stable. 

There’s no guarantee of profit with gold over any given time frame. It went nowhere for long stretches of the 1980s and 1990s. But it held its purchasing power better than the dollar did over that period of time. The reason: Ronald Reagan was a monetarist, and worked closely with the Carter-appointed Fed Chairman Paul Volker to quash the runaway inflation and high interest rates of the 1970s by holding down the money supply. The result was a nasty short-term recession around 1981. But they had long term success in slowing down inflation. 

Most fiat currencies lose purchasing power over time, because governments eventually need more money than they can raise honestly. And as we’ve seen, some collapse outright. 

The dollar has held up better than most, largely because it sits at the center of global trade, finance, and reserves. But there’s no guarantee that will be the case forever. China, Russia, and the BRICs are constantly working to undercut the dollar as the world’s reserve currency for their own strategic advantage. And there are incentives in Congress to keep the trade deficit down and encourage job growth in the U.S. by keeping the dollar cheap, in what’s called a beggar thy neighbor strategy. 

It doesn’t have to be your whole portfolio, and it shouldn’t be. Gold historically underperforms equities over long periods of time, even after inflation. But equities can collapse by half at any moment.

Gold can be bumpy, too. But when stocks collapse, there’s often a flight to safety, including to treasuries and gold. If that happens, you’ll be glad to have that gold exposure, and some extra purchasing power to buy good stocks while they’re on sale.

Thanks for reading Wealth Money Catalyst, and we’ll see you next week! 

—

John E.
Wealth Money Catalyst

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